Tuesday, November 11, 2008

[Latest Endogenous Liquidity Index: -60.7%; Latest Global Dollar Liquidity measure: +37.7%]

- A 15% GDP contraction? Liquidity @ Financial Times. As a big fan of credit spreads (the best forward-looking indicator in terms of corporate earnings), I try to pay attention to what people write on the subject. It turns out that, according to Barclay's "model of implied economic forecasts from credit spreads", the market is discounting "as much as a 15 per cent decline in real gross domestic product for the US next year". Now, that's what you'd call a recession! Barclay's strategists are convinced that credit markets are wrong, and that equities at current prices might present "the buying opportunity of a generation". Perhaps. But watch the Moody's Baa ten-year spread (my own key benchmark): at 550 bps, it simply refuses to yield (pun intended). Not a good sign. [John Authers: "Time to buy?", Financial Times]

- Hong-Kong, Argentina & the dollar peg. Hong-Kong celebrates 25 years of US dollar peg. Meanwhile, Argentina broke away from its own peg in late 2001. Pegging your currency to the dollar is no panacea: you can't avoid episodes of both deflation (1999-2001) and inflation (2005-2007). Hong-Kong is willing to pay the price: "Where else should we go?", asks Donald Tsang, HK's chief executive. In 2008, Argentina faces the specter of stagflation. Its GDP is one of the most volatile in the world; there are no monetary policy rules, no checks and balances, no nothing — the perfect recipe for an ultra-high cost of capital. And while Argentina scrambles to protect is pseudo-currency, the HKMA lowers its target for the base rate to 1.5%. [Tom Mitchell: "Hong Kong celebrates 25 years of US dollar peg", Financial Times]

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